TaxTMI 
TaxTMI 
2018 (4) TMI 1979
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....n allowing the claim of the warranty provision without appreciating that the same was contingent and has been made on estimate basis and the assessee has not been able to discharge the onus to prove that it is a reliable estimate which has been worked out on a scientific basis according to the previous experience in the product and therefore Apex Court decision in the case of Rotork Controls India Pvt. Ltd. 314 ITR 62 is not applicable in this case." 3. Brief facts are that the assessee has debited a sum of Rs. 21,10,038/- as provisions for warranty and claim the same as deduction. The assessee explained before AO vide submission letter dated 20-12-2011 that the warranty provisions is credited on the basis of past experience and on estimate computed amount for warranty. The AO noted that the assessee has not brought on record the expenses incurred on account of warranty given on sale of its products, nature of warranty and provision how arrived. According to AO, the provision credited on ad hoc basis without any scientific estimate is not allowable. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) after considering the submissions of the assessee deleted the di....
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....ween nature of sales, warranty provisions made and actual expense incurred against its subsequent sale. 5. On the other hand, the learned Counsel for the assessee explained that the assessee gives post sales warranty against the performance of its product and manufacturing defects therein. This can be observed in the terms of delivery and payment mentioned in the sample copies of the order confirmation document. The order confirmation includes warranty as a part of the contracted sales price and warranty is a simultaneous obligation incurred by the assessee in the year of sale. Also, the sales price is inclusive of the estimated warranty cost. The assessee is bound by a contractual obligation to repair the defects or replace the defective parts and materials arising within the warranty period. Thus, the provision for warranty is an ascertained liability (and not an ad-hoc liability) which arises at the time of sale and may have to be discharged at any time within the warranty period. This view is further supported by point 15.1 of 'Significant Accounting Policies' mentioned in Schedule 'U' to the audited financials of the FY 2008-09 (enclosed in the paper book), which states as ....
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....y that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation." 8. Further, the learned Counsel for the assessee also relied on Bharat Earth Movers (supra), which has been relied on by the learned Sr. Departmental Representative and he referred to the particular observations of Hon'ble Supreme Court which reads as under:- "4. The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of ....
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....e taking the value as on 31-03-2009 the assessee had deducted the value at Rs. 1,22,690/- and for building at Rs. 84,53,034/-. The assessee while filing its return of income declared long term capital gain on sale of this property. However, the AO noted that this property is depreciable asset and assessee has shown the land and building as one asset and therefore the same was assessed under short term capital gain under section 50(1) of the Act and therefore the AO computed the short term capital gain at Rs. 4,89,24,276/-. Aggrieved assessee preferred the appeal before CIT(A). 12. The CIT(A) after going through the factual position assessed the sale proceeds of land as long term capital gain at Rs. 3,82,85,944/- and balance of building amount of Rs. 50,46,966/- (1,35,00,000- 84,53,034/-) treated the being difference of Rs. 1.35 crore minus the WDV value of the property at Rs. 84,53,034/- as short term capital gain. The CIT(A) for treating the short term capital gain observed in Para 5.9 and 5.10 as under: " 5.9 In the case of the appellant, the moneys paid in respect of the factory building, being a depreciable asset, exceed the written down value by an amount of Rs. 50....